They also allowed them to pile on brokered deposits arranged by third parties that aggregated money from savers across the country seeking a higher interest rate.

A material loss review, the equivalent of an autopsy, by the FDIC's Office of Inspector General on FirsTier Bank of Louisville supports Martin's claims.

"Soon after it opened, FirsTier departed from the business plan projections it submitted with its application for federal deposit insurance by embarking on a rapid growth strategy centered in ADC (construction) lending," the FDIC's Office of Inspector General wrote.

Poor credit underwriting on construction loans and the heavy reliance on brokered deposits also were stated as causes of the bank's failure.

Acting state Banking Commissioner Fred Joseph, however, said he has seen no indications that bankers and their investors deliberately followed a trajectory they knew would end in ruin. "They were doing it for what they thought was the good of the bank," he said.

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But the eight Colorado banks that have failed since 2008 had loan growth rates, when averaged, of 900 percent from the end of 2003 to the end of 2008.

By comparison, all bank loans in the U.S. grew 44 percent over that period, while all Colorado bank loans rose 76.2 percent.

No speed limit posted

There is no hard and fast rule on how quickly a bank can grow and remain safe and sound. But given the wreckage left behind, it appears many Colorado banks exceeded that speed limit, costing the nation's deposit insurance fund an estimated $2 billion.

Several failed banks were young, either startups or older banks in the hands of new investors, making any changes large, percentage-wise.

But even the absolute numbers show a startling rate of acceleration.

Between Dec. 31, 2003, and Dec. 31, 2008, FirsTier grew its loan portfolio from $13.3 million to $708 million.

Not to be outdone, Colorado Capital Bank of Castle Rock took loans from $38.4 million to $749 million over the same period.

New Frontier Bank in Greeley went from $304.5 million in loans to $1.5 billion in that time frame before it crashed and burned in 2009.

As a point of reference, loan portfolios at all Colorado-based banks averaged $230 million at the end of 2008, an amount some Colorado banks haven't surpassed after decades of lending.

What allowed regulators to look askance at rapid growth was a focus on profits rather than the quality of assets or loans, said Kamal Mustafa, chairman of Invictus Consulting Group, which "stress tests" banks for regulators and hedge funds.

"If you could go out and get more business and be profitable, you were considered a good bank," Mustafa said.

Rapid growth can prove dangerous to a bank's health in several ways.

A key one is that loan underwriting standards and risk controls are more likely to get compromised, Martin said. And if enough banks are growing rapidly in a market, property values can get distorted, leaving banks and their customers vulnerable to a crash.

"Because investors' exit strategy is the sale of the bank based on asset size, they grow assets," Martin said. "You end up making loans that shouldn't be made."

Heavy on land, construction

In hindsight, the amount that some of the failed banks held in real estate-backed loans looks startling, especially when compared with the U.S. average.

Loans to acquire land and fund construction projects grew nearly 23.4 percent a year from 2003 to 2008, rising from 5.1 percent of all U.S. bank loans to shy of 8 percent by 2008.

But among the banks that failed in Colorado, construction loans represented 36.8 percent of total loans on average and in two cases nearly 60 percent.

The average growth rate of construction loans at the eight failed banks was 3,000 percent in five years.

FirsTier had $3 out of every $4 it lent out in either construction or commercial real estate loans at the end of 2008. At Bank of Choice and Colorado Capital Bank, the rate was $2 out of every $3 lent.

Construction loans are riskier for banks than other loan categories in several ways, Mustafa said.

For one, projects don't generate cash, so interest is paid out of loan proceeds, masking problems. The loans also are dependent on another lender stepping forward to take over financing once the project is completed.

And if the project doesn't get completed or a new lender doesn't appear, then a project's value can drop precipitously, leaving banks with a huge write-off.

"The extended and rapid growth in real estate in the United States created a complacency with this form of lending, a complacency not justified by the structural parameters of construction loans," Mustafa said.

Because they came with higher fees and didn't require as much work to monitor, some bankers favored them as a way to grow rapidly, Martin said.

But others counter that larger forces were at work that clouded the vision of bankers and regulators alike.

Had the Federal Reserve not overheated mortgage markets by keeping interest rates artificially low, banks wouldn't have followed with such heavy construction lending, said David Brown, president of southeast markets for Centennial Bank, a more conservatively managed bank.

"I think regulatory failure was a very small piece of what happened," he said. "Most of the bubble popping wasn't created by the banks. It was that the valuations were going up on the houses."

Don Childears, president and CEO of the Colorado Bankers Association, adds that strict limits on concentration aren't necessarily the answer.

A bank lending to developers in a growing suburb will make construction loans, just as a bank in farm country is going to make agricultural loans.

"Try making a loan that is not tourism related. It is all tied to tourism," Childears said of a bank based in Vail.

Mustafa agrees that banks must swim in the pond in which they are born. But construction loans needed tougher scrutiny rather than the light hand they received in the boom.

Business loans get reviewed at least quarterly, if not monthly. Construction loans sometimes didn't get a serious second look for five years.

He recommends borrowers be required to put more equity into projects, loans be reset and reviewed more frequently, and more accurate valuations be placed on partially completed projects.

All of that would have helped combat excessive concentrations and in turn restrained rapid loan growth.

Chasing hot money

To fund their lending, most of the failed banks relied on deposits from outside their core market, officially known as brokered deposits.

Because those deposits seek the highest yield and tend to move around, critics have another name for them — hot money.

Brokered deposits accounted for 23.4 percent of deposits of failed Colorado banks at the end of 2008, but only 8.5 percent of the total in Colorado and 6.1 percent of the total in the U.S.

Had regulators forced banks to rely more on the deposits drawn from their local markets, bankers might have lent at a slower pace.

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